Bank of Montreal hikes dividend as profit climbs

Canadians’ appetite for debt is finally starting to slow and that’s forcing banks to compete ever more aggressively by cutting rates on mortgages and other loans. As a result, they’ve managed to keep their customers coming but they’re working harder than ever to make money. The good news is profits are still growing.

Bank of Montreal on Wednesday reported second quarter net income of $1.08-billion, up 12% from last year and well ahead of analyst expectations.

BMO also raised its quarterly dividend 2.6% to 78 cents a share.

The results follow a trend set by BMO’s larger peers including Royal Bank of Canada and Toronto-Dominion Bank, which also exceeded expectations.

Like the other big banks, BMO continues to benefit from the ongoing housing boom, which has been pushing up profits in the sector for more than a decade.

Adjusted net income, or profit excluding one-time and unusual items, came in at $1.63 a share, compared to analysts’ consensus of around $1.52.

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The main drivers were higher volumes of consumer mortgages and other loans at the core domestic retail operation and stronger trading revenue in capital markets, but nearly all of BMO’s operations performed well.

Canadian retail had a profit of $480-million, up 14% from last year but down slightly from the prior quarter as higher revenue was offset by shrinking net interest margins.

What’s happening is that Canada’s frothy real estate market is starting to cool in some regions, and banks are being forced to offer sweeter deals to keep the business flowing. That means net interest margins — the difference between the banks’ cost of funding and the rates they charge customers — are getting thinner, pushing down profits.

Analysts are betting that housing is headed for a soft landing and that BMO and its peers will not be significantly affected.

“We believe that BMO’s earnings should be well received by the market and would be surprised if BMO did not gain some significant ground against its peers today on the back of its impressive earnings,” said Barclays Capital analyst John Aitken.

Capital markets had a profit of $305-million, up 17%, especially on robust trading. Trading typically includes areas such as fixed income, currencies, commodities and equities. Banks in the U.S. and Europe have seen trading activity shrivel in recent quarters but the Canadian banks continue to buck the trend, a phenomenon that some observers attribute to the concentrated structure of the banking industry in this county.

Wealth management also had a strong quarter, with a profit of $194-million, up $38% from last year on higher assets under management and rising revenue in traditional wealth management.

Earlier this month BMO announced the completion of its $1.2-billion acquisition of U.K.-based F&C Asset Management PLC.

Amid rising concern about over-leveraged Canadian consumers, BMO and its peers are looking for ways to reduce their reliance on retail lending. One of the most attractive alternatives is wealth management, due to its low risk level and consistent stream of fee revenue.

One of the few businesses that failed to report profit growth was the U.S. bank, which had net income of $140-million, down 6% as pressure on net interest margins offset positive loan growth.

Adjusted net income, or profit excluding one-time and unusual items, came in at $1.63 a share, compared to analysts’ consensus of around $1.52.

“Although bears may point to the ongoing pressure experienced in BMO’s margins on both sides of the border, its domestic loan growth is largely holding with its peers and growth in the U.S. was impressive,” said Mr. Aitken.

Commercial loans in Canada grew by 10% compared to 2013, and 4% from the prior quarter. In the U.S. they were up 19% from last year.

Capital markets had a profit of $305-million, up 17% on good performance from trading as well as investment and corporate banking. Trading typically includes areas such as fixed income, currencies, commodities and equities.

Wealth management also had a strong quarter, with a profit of $194-million, up $38% from last year on higher assets under management and rising revenue in traditional wealth management.

Earlier this month, BMO announced the completion of its $1.2-billion acquisition of U.K.-based F&C Asset Management PLC.

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